A perfect storm
February 7th, 2010 by Jim CrowderThis morning I was reviewing some articles in our local (Portland, Or) Business Journal. One article in particular caught my eye as it begins to tell a story we’ve been predicting to our partners nationally. Commercial building owners and investors are under extreme pressure and we’re just seeing the early stages of it. Here are some excerpts:
“It takes a perfect storm to trigger the wave of foreclosures, receiverships and bankruptcies that washed across some of Portland’s most prominent offices in recent months.”
“Vacancy rates rose, income fell, financing disappeared and shifting capitalization rates drove down building values.”
“Every building reflects its own unique circumstances, but collectively, the wave of building-related news tells a chilling story of struggling business models, loan payments missed and owners wrestling with real estate that’s no longer worth what they paid, or owe.”
I have to believe that if we surveyed each and every Business Journal across the country, we would see similar articles detailing the pain being felt in commercial real estate markets. There is nothing unique about what we are experiencing here in Portland. Indeed as I travel across the country visiting with commercial ownership and management it is apparent that we are just experiencing the tip of the iceberg.
These people are scared. Many of them came into the industry at the beginning of the boom and have never experienced anything like what we are going through now. Steady demand for office space drove up rental rates which, in turn, drove up asset values. Hardly the formula we’re seeing in to today’s market. Instead, vacancy rates are hitting 20% in a lot of markets, asset values are plummeting as much as 40-50% and owners and managers are trying to get a handle on their operating costs, something many of them have never had to do before.
They understand that the only avenue they have for preserving their assets is a focus on operating cost cutting. Constituting approximately 40% of the variable operating cost of a building, energy is the place they need to focus. And with HVAC and lighting making up 70% of those operating costs, owners and managers can cut a lot of cost out of their model. Interestingly enough, according to BOMA, owners could cut their utility costs by 10-30% without any capital investment. By just working with their local HVAC Mechanical company, they could modify their current service agreement to include these incredible cost cutting services. This overlooked service base could literally generate monthly cash savings for owners if owners would just ask for help ( or maybe contractors should point this out to their customers).
It’s not about windmills, cogeneration, or new fuel cell technology. There’s gold in those buildings and the HVAC industry is poised to help owners mine some of it and help owners get back on solid financial footing.
